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  • Mathieu Provencher

Cross-Price Elasticity of Demand at work

Hi everyone! Today I have a very exciting experience to share: I found a real-life example of cross-price elasticity of demand!!!! Awesome right?

I noticed lately that my usual bus company decreased their price for my route. I noticed as well that it is now much less crowded than it was a few months ago... what happened?

Well... as is VERY obvious from the definition of cross-price elasticity of demand (come on, be honest, who actually remembers the equation... and more importantly what it means), what happened is that demand for a substitute product increased.

But who could possibly compete with your nice bus company, might you ask???? The (formal) blue buses did! The increase in demand came a little while after they were introduced to the market as it took some time for people to see if it was good or not (remember my viagra example in class). In addition, the blue bus is actually cheaper if you go far enough.

This lead to a decease in demand in other "similar" bus lines (the big and safe ones... not the ones some students take, risking her life to save a bit of time... you know I'm talking about you), which brought a decrease in their price.

SO, an increase in quantity demanded of a substitute product leads to a decrease in demand of the product, which leads to a decrease in its price! Voilà, THAT's cross-price elasticity of demand for you guys! Well... it's a bit more complicated than that but let's leave it as it is.

As Always, Economics Works!!!!!

Let me know what you think.

Now... to be completely fair to all of you I have to mention a number of third variables that may actually have produced these results instead of the causation I argue it might be... (1) The first time I made this observation coincided with a substantial decrease in the price of oil... as such, it is possible that the competing bus company decreased their price independently of the introduction of the blue bus. It seems unlikely but it is possible. (2) My measurements were not made at the same time of the day. My first observations of the effect of the introduction of the blue busses on the price of the competing bus line was made around 13h while I compared that price to my previous measurement, which was made around 8h. It is possible that the bus line consistently asks higher prices in the morning and lower ones around noon, where there may be less clients. (3) I saw an increase in the price of the competing bus line when the blue busses were taken down, which happened when I took the bus in the morning again. Same problem as before: I may have measured an increase in price because of taking the bus in the morning, not because of the blue busses being removed. (4) my last measurement is again after noon, which may again be of a lower price not because of the re-introduction of the blue busses but because of the time of the day. Here you go, My observations confirm the concept of Cross-Price elasticity of demand, ceteris paribus... However everything else changed all the time so it cannot be used as a proof... it simply supports my hypothesis. Welcome in human sciences guys!

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